Once upon a time, hotel investors in Germany could amass business hotels in its big seven cities – and a few of its smaller, thriving centres – and let the purring engine of the German economy do the rest. Yet the shocks of the last few years now necessitates a significant mind shift from both investors and operators to create portfolios with much more crossover appeal – while reevaluating the country’s tourism potential.
“On the whole, German hotels have adapted well in terms of moving away from a business-only focus. Even the big conference hotels have rolled out strategies to attract guests on weekends,” suggests Stefan Giesemann, managing director, EMEA hotels & hospitality capital markets – Central, Northern & Eastern Europe at JLL. “That’s not to say that MICE and corporate hotels don’t have a future – a strengthening economy and the continuing presence of global enterprise guarantees that.”
Nevertheless, it’s a transformational moment for Germany’s hospitality scene just as its economic woes come to the fore, with some market watchers dubbing it the ‘sick man of Europe’.
Economic challenges
Germany isn’t accustomed to being at the bottom of the pack, but sluggish GDP growth over the past 10 years – just 1.1 per cent annually compared to the EU average of 1.7 per cent – has arguably exposed the flaws in its political steering. Today, the country is a far cry from the glory years of 2010 to 2015 when the economy soared by 2.1 per cent yearly, while average EU GDP excluding Germany rose just 0.8 per cent year-on-year. Yet as Merkel-mania has given way to question marks about the decades of importing cheap energy and exporting goods – strategies that fell apart in the light of the pandemic and war in Ukraine – Germany today is experiencing something of an identity crisis.
“The German real estate market has suffered because those challenges have been recognised but not solved, so interest has waned in German real estate,” argues Axel Vespermann, head of real estate at Frankfurt-headquartered asset management and fund service platform Universal Investment. “But then again, German property has been extremely favoured by international capital for a long time, and I wouldn’t want to suggest that’s over.”
Indeed, Germany’s federal structure gives its real estate markets a strength in depth that few would wish to bet against. Boasting seven regional ‘capitals’ - Berlin, Hamburg, Munich, Frankfurt, Cologne, Düsseldorf and Stuttgart – domestic and international demand continues to underpin its transaction volumes. Total real estate deals may be down some 50 per cent year on year - with CBRE logging a total transactions volume of €21.4 billion in the first three quarters of 2023 - but hotel sales have held up reasonably steadily, slipping by an analogous 47 per cent to €156 million year to date, comparing favourably to its office and residential markets which have both slumped by 75 per cent and 80 per cent respectively.
New research from Cushman & Wakefield, meanwhile, finds signs of growing granularity in secondary hotel markets like Leipzig and Dresden. Data shows that the former has become 26 per cent more attractive to hotel operators since 2021, while the latter’s attractiveness has risen 23 per cent.
What could be driving this? Giesemann points out that Germany is still on a post-pandemic recovery curve. While it may be taking longer than France, Italy or Spain, the timeline is in line with forecasts, he notes. “During Covid, when we did these polls about when hospitality was likely to bounce back, the consensus was for 2024, 2025,” he says. “That suggests that Germany is right on track.”
A larger trend is also solidifying, suggesting that Germany is benefiting from the broader tourism flows to Europe, strengthening its reputation as a market for leisure travel.
Leisure pivot
There is increasing investor interest in dedicated resorts, with Union Investment Real Estate one such institutional investor to have acquired two resort hotels in the last 12 months. Comprising the Marriott Bonvoy Autograph Collection boutique hotel on Lake Tegernsee and the Grand Palais Steigenberger on the German island of Usedom in the Baltic Sea, Andreas Löcher, head of investment management hospitality at Union Investment, says: “The resort hotel sector has experienced decades of growth. It has shown itself to be crisis-proof and demonstrated its resilience again during the Covid-19 pandemic.” However, Löcher is quick to underline that the firm’s 88 other hotels are city centre properties which “are able to capture business and leisure travel”.
TwentyTwo Real Estate, a European real estate investment and management firm, recently picked up Center Parcs Allgäu in Germany, one of the largest and most recent Center Parcs in Europe. The site is leased and managed by the Pierre & Vacances Center Parcs group. Notes Daniel Rigny, founder and CEO of TwentyTwo Real Estate: "This investment underlines our strong interest in leisure and destination hospitality, in particular in positive-impact tourism assets with a leading position in their local market. We are delighted to have acquired the major part of this property, which is Germany's leading branded hotel by revenue. This acquisition is also the largest single-hotel transaction in Europe so far this year.”
Outdoor and adventure travel
Located in South-West Germany, not far from Munich, Stuttgart and Zurich, the park, which opened in 2018, spans 184 hectares in an area of considerable natural beauty. The deal in fact underlines a growing trend for outdoors and adventure holidays, which Giesemann suggests are now rivalling traditional summer vacation plans. “Outdoors is a key watchword, with hiking in the mountains, for example, catching up with classic beach holidays. A successful summer season has now been created in the Alpine region.”
Limiting the growth of this segment currently is the “fragmented market, with not so many professional operators in place”. Yet signs suggest this is changing. Branded residences in the German, Swiss and Austrian Aps such as of Six Senses Kitzbühel Alps and the The Chedi Residences in Andermatt, for example, are building on the spending power of luxury travellers while creating inland assets that have year-round appeal.
Overall, “many operators have quite aggressive expansion plans for Germany, with a lot of faith in its potential,” Giesemann underlines. The main factor blocking new development remains the availability of financing, with bids for new projects facing something of a liquidity crunch. Add in the high-profile bankruptcy of several German developers in the last 12 months and the market isn’t quite firing on all cylinders.
Firms including Gerchgroup, Centrum Group, Euroboden and Project Immobilien all folded, and while their pipelines only marginally impacted hotel delivery, there is a fear that a lull in development activity could harm the future of home-grown construction firms and the availability of labour in Germany. There is, however, ample potential for repositioning and re-letting properties, as part of Germany’s broader hotel renaissance, Giesemann says. “At the end of the day, ADR has already exceeded pre-pandemic volumes and we’re at 80 / 90 percent compared to 2019 in terms of arrivals, overnights, and flights. Germany’s making good progress.”